Food Prices on the Rise Amid US Drought

18 July 2012

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With more than half the continental US experiencing a severe drought, global food prices have skyrocketed in recent days. Separately, long-term projections just released by the UN Food and Agriculture Organization (FAO) and the Organisation for Economic Co-operation and Development (OECD) expect prices to remain high over the coming decade - with possible benefits to developing countries that invest in agriculture.

“The tranquil situation we were expecting earlier this year is evaporating very quickly,” Abdolreza Abbassian, a grains expert at the UN Food and Agricultural Organization (FAO), told Bridges.

A few months earlier analysts projected global food production to grow smoothly in the wake of high prices in the previous year. However, low stocks and one of the driest months on record in the US - one of the warmest globally - have led traders to push up prices for corn and soy in the past few days, critical exports from the country.

High food prices drove millions into hunger in 2008, according to the FAO. Rice was blamed as the culprit at the time, as prices doubled and then tripled all within a matter of weeks. Abbassian observed that rice production was stable this year, but that the complex interplay for food, animal feed, and biofuels between corn, soy, and wheat would be critical for prices.

Disaster on output declared in much of the US

The situation across the US is “one of the worst two or three droughts of the century,” Chris Hurt, Professor of Agricultural Economics at Purdue University, said in a recent interview with OnPoint Radio.

In the US state of Illinois, both the country’s second-biggest corn producer and one of the hardest hit by the drought, 26 percent of the corn crop is “nearly gone,” Hurt explained.

Corn and soy remain the worst affected crops by far. Darrel Good of the University of Illinois explained in a recent post for farmdocDAILY, an expert blog, that for these crops yield may “be lower than now anticipated.” Coupled with a shortfall in the 2012 South American crop and large purchases of US soybeans by China, prices may have reason to climb, he added.

Long-term outlook mixed for developing countries

High food prices, often caused by changes in major producers, can both benefit and hurt farmers. Farmers that are net buyers, often small, have to fork over a greater share of their income to food purchases while others, often large farmers, are able to benefit from investments made in earlier years.

FAO Director-General José Graziano da Silva noted as much in a recent statement launching the OECD-FAO Outlook 2012-22. “High real prices for agricultural commodities provide higher incentives for farmers and rural development,” he said, while cautioning that high food prices have also caused considerable hardship for consumers.

Abbassian of the FAO told Bridges that what was happening to those most at risk for hunger was “more a macroeconomic question,” since extreme poverty had priced many out of markets. For example, he added that in the Sahel, a region in Sub-Saharan Africa already experiencing hunger, people “are dependent on what can be locally produced” and not so much on grains, such as wheat, from the world market, “even though aid is shrinking.”

Still, developing countries are projected to account for the majority of exports of certain commodities by 2021 according to the OECD-FAO report, including rice, sugar, poultry meat, and fish - with consequences for both farmers’ incomes and hunger.

Notably, emerging economies are set to hold an increasing share in global agricultural trade. Countries like Brazil, China, Indonesia, Thailand, Russia, and Ukraine have made investment efforts to push agricultural production capacity for exports and domestic markets.

Questions remain among analysts, however, as to what effects the US situation could have in the long-term, with Ernie Goss, a professor of economics at Creighton University, predicting that the drought could have “regional, national and even international impacts,” according to comments reported by Bloomberg.

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